Building Our Debtor’s Prison

Sometimes I want to take a baseball bat to the television.

What’s presented as news and analysis can often be garbage… or worse.

The other day on Bloomberg TV Tom Keene and guest Leo Hindery were discussing the national debt ceiling. They couldn’t understand why anyone would oppose raising the debt limit. This led into a conversation about debt in general, where they openly mocked people who think of debt as a moral issue.

At that point I hit the mute button and shook my head, wondering how people like Keene and Hindery become so far removed from everyday life.

I’ve got news for them…

Debt is a moral issue.

Debt only stops being a moral issue when your income and assets are large enough to make any debt payments an afterthought. If you ever look at the credit-card bill with unease, or you consider how much of your income it takes to make both the student loan payment and the rent, then you understand this point.

A debtor is someone who takes money from another person or group of people and then uses it for his own purposes. He makes a promise, usually accompanied by a personal guarantee, to pay back the money.

No one forces a debtor to do this; he chooses to do it.

And when he does it, he starts to build a virtual financial prison of his own.

A borrower must remain employed or gain employment for a wage that allows him to pay back his debts, or else he risks ruining his credit history and his good name. He risks breaking a personal guarantee and promise that repayment was going to happen.

With the debt hanging over his head, the debtor’s financial freedom is now limited. He can’t simply quit his job and wander the country. He can’t take on a lesser-paying job that might provide more fulfillment or time with the family. He can’t take the same entrepreneurial chances he might have. And he can’t tell an employer where they can stick a job if the employer demands wage and benefit cuts.

Of course, the flip side is that borrowing against future earnings affords people a higher standard of living immediately. We buy cars, homes, gadgets, food and vacations on credit instead of with savings.

There is no question of the trade-off. Betting a loan today against earnings tomorrow can work out well. But what happens if earnings tomorrow disappear?

Ah. Therein lies the rub.

What if future earnings fail to materialize or are drastically reduced? The borrowed money was still spent. The debt still exists. The promise is still in the air. And the signature is still on the paper.

At this point the debtor is in a bind. He has taken something concrete (the money today) and promised part of something that was expected but failed to materialize (money tomorrow).

In this case, the borrower has a lousy set of choices in front of him. He can sell whatever he owns to make good on his promise, borrow from yet another source, cut expenses or simply default.

None of these sound good, as they each involve loss. The borrower can lose some of his assets, he can become indebted to someone else (losing more freedom), he can lose some of his standard of living, or he can lose his good name and respect.

I don’t think Messrs. Keene and Hindery have spent any time pondering which of these losses they would choose if faced with such a circumstance. I don’t think they are in touch with the millions of Americans who have lived this exact life over the past six years, watching expenses increase while wages either went flat or dropped.

I think they are out of touch.

As my kids go through school and off to college, we’ve had many conversations with them about debt and what sort of limitations a person can put on himself.

It’s possible to live an extravagant lifestyle and indulge one’s self by taking on credit in many forms, but it doesn’t mean it will end well. At some point, you might be faced with having to decide what kind of loss you’re willing to take.

I’ve tried hard to get my kids to see the choices they make as they potentially take on debt and spend, and to understand that each time you let someone else have a claim on you it’s like building your own prison walls a little higher.

It’s a choice. And you need to be careful.

Rodney

 

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.